Why Relying on Your Home to Fund Retirement Is a Bad Idea
In my many years of financial planning my clients have often asked me to include the house they are living in as one of the assets that they will use to fund their retirement. This stems from the notion that property values tend to appreciate over time, potentially providing a substantial retirement nest egg. However, relying largely on the value of your home to fund retirement can be risky and may not yield the expected financial security. Here’s why:
Significant single asset:
Relying for what will be a large portion of your wealth residential property, even if it is the home you are living in, ties your financial well-being to the fluctuations of the housing market. While during the “good old days” of international boycotts we could rely on the hothouse of the property market to push the value of our home upwards year after year. Now that investment opportunities exist all over the world the “guarantee” of ever-increasing home values have fallen away. In addition, unlike other investments such as shares or unit trusts, property is not a liquid asset it takes time and money to liquidate the home you live in. Importantly your own home generates no income (like dividends or interest) so the only cash flow is the realised capital in the once off sale
Uncertain Market Conditions:
As mentioned, historically, residential property has shown appreciation, however in this modern, internationalised, investment world, future trends are unpredictable. Economic downturns, changes in interest rates, or local market conditions can all impact property values. Depending solely on your home’s value assumes a steady or rising market, which isn’t guaranteed anymore. In addition, property values can be influenced by local economic factors, such as job growth, infrastructure development, and demographic shifts. Depending on your location, these factors could affect your home’s resale value.
Inflation and Longevity Risks:
Inflation has the effect of increasing the cost of a new residence, so often, downsizing to a smaller home, particularly a new built home, can result in little or no funds being released to live off. Also, with better medical care and healthier lifestyles, many people face the prospect of living many years longer in retirement than ever before, the value in your home on its own may not generate enough return to cover that period.
Emotional Attachment and Lifestyle Adjustments:
Many homeowners develop emotional attachments to their homes, making it difficult to sell even when financially advantageous. It also influences the decisions about where one will move.
Conclusion:
While owning a home can contribute to your overall financial strategy, relying solely on its equity to fund retirement is risky. Diversifying your investments across different asset classes (such as stocks, bonds, and real estate) provides greater stability and flexibility in adjusting to market conditions and your evolving financial needs. Consider consulting with a financial advisor to create a well-rounded retirement plan that aligns with your goals and mitigates potential risks associated with relying too heavily on your home's value. By doing so, you can ensure a more secure and adaptable financial future during your retirement years.